IPO

Taking your company public

The decision to go public is a critical one. Going public involves a substantial commitment of financial and management resources and cannot be easily reversed. Picking the optimal time to start an IPO process is something of an art because it depends on two elements being present at the same time: (1) the company must be ready for the IPO market and (2) the public markets must be willing to invest in IPO companies like the company. Since the company cannot control the latter factor, companies wishing to go public need to put into place a number of necessary items that potential underwriters and public investors will expect so that when a market window does open, it is ready to take advantage of the opportunity.

IPO companies typically are built on people, intellectual property and market opportunity. Companies increase their chance for a successful public offering if they have a management team in place that is committed to the IPO effort and has the skills and experience to carry it out, seasoned professional advisors who can guide it through the complex financial, legal and accounting requirements necessary to complete an IPO, an intellectual property position that will protect the company’s competitive advantage in the market and a strong competitive position in a large and growing market. Biotech companies present a somewhat unique case—sales and profitability at the time of the IPO are significantly less important than the patent position of and the likelihood of FDA regulatory approval for the pharmaceutical products being developed.

Building the right team is vital to a successful IPO. The company should examine its board of directors and determine if a change in the composition of the board is warranted to ensure that the board has the capabilities that it will need to operate as a public company. In particular, exchange listing requirements and tax regulations may necessitate adding independent board members who can serve on the Audit Committee and Compensation Committee of the public company. In addition to a talented CEO, the executive team should include a CFO who has experience in handling public markets and a capable accounting team that can provide the support that is needed to handle the extensive accounting disclosure required in the IPO offering documents, as well as the myriad ongoing public company responsibilities, including compliance with the Sarbanes-Oxley Act.

Experienced professional advisors are critical to a successful IPO process. First and foremost, IPO candidates need to examine the capabilities of their existing outside auditors. Familiarity with the existing audit team and the auditing firm’s knowledge of the company must be weighed against the need for extensive IPO and public company capabilities. IPO candidates who are not using one of the Big 4 firms, another national firm or a highly regarded regional firm with IPO experience, need to consider switching to an audit firm with more IPO and public company capabilities. It is not uncommon for a company to outgrow the local audit firm that provided excellent, cost-effective service while the company was private but lacks the experience and resources to execute an IPO. However, as switching accountants can be quite disruptive, a company that finds it necessary to do so should provide ample time for the new accounting firm to complete any audits work that may be necessary and otherwise get up speed in advance of the commencement of the IPO process.

Outside counsel will lead the preparation of the offering materials and will take the lead in the SEC filing process. Similar to the analysis involving auditors, a company must take a critical look at its outside counsel’s capabilities. There is no substitute for counsel with substantial and relevant experience, including serving as counsel in many IPOs, preferably including offerings by companies in the same industry, advising public companies on their ongoing reporting obligations, and having relevant knowledge of not only the relevant securities laws and the IPO process, but also key legal issues affecting the company’s industry. Experienced company counsel also understand the due diligence process and other underwriter’s requirements. In advance of the commencement of the IPO process, counsel should help the company undertake the necessary organization of corporate records and other various aspects of corporate housekeeping. This advanced preparation will not only facilitate the completion of the IPO, but also build the confidence of the underwriters and the other offering participants that the company is ready to operate successfully as a public company.

The company will need to select underwriters to manage the offering. The company’s directors, outside counsel and independent auditors often will have contacts with investment banking firms and can help guide the company to underwriters with strong track records and expertise within the company’s industry. In some cases, investment banks will have already initiated contact with a company they believe is an attractive IPO candidate. A company seeking to undertake an IPO should begin to build relationships with investment bankers and key research analysts. These professionals can offer useful insights and planning guidance early on at no cost to the company.

Nearly every IPO candidate has intellectual property assets. For technology or life sciences companies intellectual property is often their most critical asset, but almost all companies rely on some combination of patents, trade secrets, trademarks, copyrights, domain names and other intellectual property in their businesses. Before undertaking an IPO a company should take stock of its intellectual property assets. Together with its intellectual property counsel the company should evaluate the strengths and weaknesses of its intellectual property position and determine whether it needs to take any necessary actions to shore up its intellectual property position, such as making additional patent filings, addressing compliance with existing licenses (particularly with respect to any open source software uses) and ensuring that any technology developed by third-party contractors has been appropriately assigned to the company.

A company that has developed a strong and growing business in an attractive market, put in place an experienced team and secured its intellectual property position is well-positioned to execute an IPO. Advanced preparation facilitates the offering process, builds confidence in the company’s capabilities and will allow the company to act quickly when the securities markets are most receptive to IPOs.